A Wake-Up Call for CEOs and CFOs: Non-Compliance is a Criminal Offence

By Annalise Kempen

In the shadows of boardrooms and financial statements lurks a silent menace that threatens the very foundation of businesses worldwide: fraud and corruption.

The aftermath of the State Capture era and revelations from the Zondo Commission highlight the prevalence of fraud and corruption in companies, often catching executives off guard.

For CEOs and CFOs, the wake-up call has sounded louder than ever.

As of April 3, 2024, an amendment to the Prevention and Combating of Corrupt Activities Act 12 of 2004 (PRECCA) introduced a new provision, section 34A, which places a reporting obligation on all “persons in a position of authority” (as defined in section 34(2)), to report knowledge or suspicion of any corruption and common law offences such as theft, fraud, extortion, forgery and uttering of a forged document, involving an amount of R100 000 or more, to a police official in the Directorate for Priority Crime Investigation. Failure to report such corrupt activities constitutes an offence.

The State Capture era and the revelations made at the Zondo Commission have taught us that many CEOs and CFOs were allegedly blindsided by the fraud and corruption in their companies. Or maybe they deliberately ignored the warning signs due to ignorance or their own involvement. The latest legislative amendment to PRECCA, which stems from a Zondo Commission recommendation, is aimed at addressing any potential excuses or loopholes for corruption by mere association with anyone who gives, agrees or offers any gratification to obtain or retain business.

The fraud and corruption risk

Fraud and corruption impact a company’s bottom line negatively because of escalating costs and pose serious legal and reputational risks. It can also impede a company’s growth prospects due to increased transactional costs, an undermining of fair competition, distortion of development priorities and the determent of long-term domestic and foreign investment. The latter is because investors shy away from investing in companies where fraud and corruption run amok due to their investment’s financial, operational and reputational risks.

Since organisations lose an estimated 5% of their revenue to fraud annually and more than half of occupational fraud happens due to a lack of internal controls or overriding of existing internal controls, CEOs and CFOs must take note of key behavioural clues among their employees to identify possible fraud. Red flags include the following:

Living beyond their means
Experiencing financial difficulties
Having an unusually close association with a vendor/supplier/customer
Displaying control issues and an unwillingness to share duties
Being irritable, suspicious or defensive
Being bullish or intimidating
Displaying a “wheeler-dealer” attitude
Having divorce/family problems.

Since procurement fraud schemes have become prevalent in recent years, other red flags to consider as possible indications of such fraud schemes include:

Collusive bidding by contractors, also known as “bid rigging”
Bribes and kickbacks
Split purchases
Rigged specifications
Unjustified sole source awards/awards without following competitive processes
Fictitious vendor
Manipulation of bids
False statements and claims by contractors or suppliers
Leaking of bid information
False, inflated or duplicate invoices
Failure to meet contract specifications
Excluding qualified bidders
Conflict of Interest

Apart from adhering to the legislative framework, the private sector must invest in robust internal regulatory and compliance policies to mitigate fraud and corruption risks. Although not mandatory, compliance programmes may prove effective in mitigating corruption risks and developing better business practices. One key focus for CEOs and CFOs should be to take a more risk-based approach to onboarding new third-party contractors and suppliers by conducting anti-corruption due diligence reviews.

Suggested approach to address fraud and corruption

Anti-fraud controls can result in lower fraud losses and quicker fraud detection, while anti-fraud and corruption can be addressed in six action steps:

Commitment to create a company culture and operational system where employees, customers and suppliers know that your company has a zero-tolerance policy towards fraud, bribery and corruption.
Identify your company’s risks and be prepared to address them, including those relating to compliance.
Develop goals, strategies and policies to drive your company’s success while ensuring that you get the buy-in from colleagues and employees by highlighting the importance of these policies.
Implementing anti-corruption and compliance programmes throughout the company and your value chain.
Practicing the “what gets measured gets done” principle by monitoring, measuring and evaluating the impact of your company’s anti-fraud and corruption policies to identify successes and areas that need work.
Provide regular feedback about anti-corruption efforts to all stakeholders, employees and supplies, while reiterating that your company is continuously striving to improve your efforts. Consider publishing the company’s fraud and corruption policy on your company’s website.

Management must be responsible for setting the tone and example at the top by creating an ethical culture through their words and actions. This requires management to be familiar with the types of improprieties that might occur within their areas of responsibility and be alert to any indication of irregularity. If an internal or external fraud investigation is launched, it must remain confidential, apart from consultation with the legal and human resources division about appropriate disciplinary and possible legal actions to be instituted against the relevant employee(s).

Conclusion

CEOs and CFOs must never consider dealing with corporate fraud and corruption as low risks as missing important red flags could jeopardise their company’s financial and reputational well-being and lead to criminal prosecution.